The most profitable investments aren’t always the most popular. Spotting opportunities in lesser-known companies can put you ahead of the crowd and on track for a big win.
Under the radar?
One possible example is FTSE 250 event and information services company Ascential (LSE: ASCL). Although it has a market cap of almost £1.4bn, this company only floated in 2016 and remains below the radar for many investors.
The group focuses on the business-to-business sector, which I find attractive. Trade marketing events and subscription-based information services are areas of the media industry that have remained profitable, while many consumer-focused services have struggled.
Ascential’s revenue from continuing operations rose by 26% to £222m during the first half of 2017. The group’s operating profit from continuing operations was 28% higher, at £48.1m. Although revenue growth fell to 7.2% when currency gains were excluded, the group’s trailing operating margin rose to 12.3%, up from 10.7% in 2016.
A second attraction is that this business appears to generate plenty of surplus cash. The group generated adjusted free cash flow of £74.5m during the first half of the year, up from £58.7m for the same period last year. This has helped management to reduce net debt from £223.7m to £211.4m so far this year.
This free cash flow also provides solid support for the dividend. And although the forecast yield is currently only 1.8%, I believe the combination of rising earnings and falling debt should drive stronger dividend growth in future years.
Although the stock isn’t cheap on 19 times forecast earnings, I think Ascential has the potential to be a profitable long-term hold.
A proven performer
You may not have heard of FTSE 250 catering firm SSP Group (LSE: SSPG). But you’ve probably been a customer of the firm at one of its airport, railway station or motorway service food outlets.
SSP trades under a wide range of well-known brands, including Upper Crust and Ritazza, as well as some franchised operations such as Burger King and Starbucks. The group also operates one-off ‘local hero’ outlets such as James Martin Kitchen at Stansted Airport.
In total, the group operates more than 2,200 outlets in over 30 countries. The business is headed by chief executive Kate Swann, whose previous role was as CEO at WH Smith. Ms Swann turned Smith’s travel business into a fast-growing and very profitable operation. The indications so far are that she’s doing the same at her new company.
SSP reported sales of £1,073m for the first half of this year, up 8.1% on the same period last year excluding currency gains. The group’s underlying operating profit rose by 24.7% at constant exchange rates to £42.8m, adding 0.3% to operating margins.
Adjusted earnings per share rose by 26% last year and are expected to increase by about 19% this year. I’d expect these gains to be accompanied by further improvements in the group’s profit margins.
Although the shares’ forecast P/E of 27 is expensive, I think there’s every chance SSP will grow into this valuation over the next couple of years. Earnings forecasts have been regularly upgraded over the last year. I believe the stock remains worth buying.